[Monthly Report] From Green to Transition: A New Chapter for the Loan Market — Insights from the Guide to Transition Loans

In October 2025, the Asia Pacific Loan Market Association (APLMA), the Loan Market Association (LMA), and the Loan Syndications and Trading Association (LSTA) jointly released the Guide to Transition Loans (GTL)[1]. This publication marks a new phase in the global loan market’s evolution toward “transition finance.” For the first time, it proposes a financing channel for industries that remain high-emitting but are actively pursuing decarbonization, with clear scientific pathways and measurable emissions reduction performance. This shifts the loan market’s role from merely supporting mature green projects to enabling the decarbonization process — becoming a key financial force in driving real economic transformation.

I. Framework Highlights: Core Principles of Transition Loans

The Guide to Transition Loans defines transition loans as financing tools that support a smooth transition of economic systems toward net-zero greenhouse gas (GHG) emissions. It first outlines six foundational components of “transition finance,” which must be met for financing activities to be classified under this category:

1. Objective Aligned: Financing objectives must align with global net-zero pathways and support the temperature goals of the Paris Agreement.
2. Avoids Lock-in Risks: Projects should avoid long-term reliance on carbon-intensive assets, supply chains, or infrastructure that could hinder future decarbonization.
3. Benchmarked Against Science: Emissions reduction impacts must be benchmarked against science-based pathways appropriate to the sector or region.

For loans structured as Use of Proceeds (i.e., purpose-specific financing), three additional criteria apply:

4. Do No Significant Harm (DNSH): Projects must not cause significant harm to other environmental or social objectives while pursuing climate goals.
5. Impact Oriented: Activities should contribute meaningfully to both short- and long-term decarbonization targets.
6. Absence of Low Carbon Alternatives: There must be no technically or economically feasible low-carbon alternatives under current conditions.

Together, these six dimensions form the basis for determining what qualifies as a transition loan.

Building on this definition, the GTL introduces five Core Components to guide practical implementation in the loan market:

1. Entity-Level Transition Strategy: Borrowers must establish or disclose a comprehensive transition strategy outlining goals and pathways.
2. Use of Proceeds: Loans must be directly linked to decarbonization actions through either purpose-based use or performance-based metrics.
3. Project Evaluation and Selection: Rigorous mechanisms must ensure each financed activity aligns with transition objectives.
4. Management of Proceeds: Transparent systems must track and disclose fund allocation.
5. Reporting: Regular disclosures must enhance market comparability and credibility.

For loans structured as Sustainability-Linked Loans (SLLs) — i.e., performance-based transition loans — borrowers must also follow the five key elements outlined in the Sustainability-Linked Loan Principles (SLLP 2025)[2]:

1. Selection of Key Performance Indicators (KPIs): KPIs must reflect the borrower’s core decarbonization priorities.
2. Calibration of Sustainability Performance Targets (SPTs): Targets must be science-based and ambitious.
3. Loan Characteristics: Loan terms (e.g., interest rates, fees) must be linked to performance outcomes.
4. Reporting: Progress must be disclosed regularly, transparently, and traceably.
5. Verification: Independent third-party verification must ensure credibility and trust.

In short, the Transition Loan Principles (TLP) define the boundaries and scientific consistency of transition loans. For both Use of Proceeds and SLL structures, GTL integrates the core elements of GLP and SLLP to form complementary implementation pathways. Structurally, the six components define “what transition loans are,” while the five principles explain “how to implement them.”

II. Comparison with the Green Loan Principles (2025) and Sustainability-Linked Loan Principles (2025)

The Green Loan Principles (GLP)[3] emphasize purpose-based financing, suitable for projects with clear environmental benefits — such as renewable energy, green buildings, pollution control, or circular economy initiatives. The Sustainability-Linked Loan Principles (SLLP) focus on performance-based structures, incentivizing companies to improve their overall sustainability through KPIs and SPTs.

GTL builds on the core principles of GLP and SLLP, aiming to expand the scope of sustainable finance to include industries that have not yet met green standards but are actively developing decarbonization pathways. By introducing the concept of a “Transition Pathway,” GTL enables financial resources to support both green-compliant projects and those in the process of transitioning.

Operationally, GTL supports both Use of Proceeds and KPI-SPT hybrid structures. For Use of Proceeds loans, GTL requires alignment with science-based decarbonization pathways or recognized taxonomies, along with robust environmental and social risk management to assess lock-in risks and the feasibility of low-carbon alternatives — ensuring real, measurable, and verifiable emissions reductions.

For SLL structures, GTL retains the core logic of SLLP but emphasizes the transition focus. Companies can set time-bound KPIs and SPTs aligned with their decarbonization journey — such as phased reductions in carbon intensity, prioritized energy shifts, or technology deployment milestones. Loan terms can be linked to these metrics through interest rate adjustments, fee reductions, or refinancing conditions, creating a positive feedback loop of “targets–actions–incentives.”

This dual-pathway design allows GTL to maintain GLP’s environmental rigor while inheriting SLLP’s flexible incentive mechanisms — equipping the loan market with tools to support companies at various stages of their decarbonization journey.

III. Relationship and Complementarity with ICMA’s Climate Transition Finance Handbook (2023)

ICMA’s Climate Transition Finance Handbook (CTFH)[4] established the conceptual framework for climate transition finance in the bond market, offering globally recognized standards for issuers to articulate transition goals, governance, and disclosures.

GTL shares the same foundational philosophy as CTFH — supporting companies in achieving Paris-aligned climate transitions — but differs in scope and financial instrument. CTFH focuses on the bond market, guiding issuers of Transition Bonds, while GTL targets the loan market, offering concrete evaluation and operational standards for financial institutions to identify and support transition financing in lending.

Notably, GTL introduces DNSH requirements for the first time — ensuring that climate mitigation efforts do not significantly harm biodiversity, resource use, or social objectives. This balance of environmental and social risk makes transition loans more robust.

GTL also differs in its approach to transition plans:

• CTFH requires issuers to have a complete, public transition plan.
• GTL allows companies without formal plans to use transition indicators and phased pathways, as long as they demonstrate a clear decarbonization direction and measurable actions.

This flexibility makes GTL especially suitable for SMEs and companies in developing economies.

IV. Market Opportunities in Mainland China, Hong Kong, and Southeast Asia

Hong Kong has long been a hub for green and sustainable finance in Asia. The release of the GTL offers a new growth opportunity — shifting from supporting mature green projects to enabling the decarbonization process. Financial institutions in Hong Kong can use the GTL framework to provide decarbonization financing for energy, manufacturing, shipping, and infrastructure sectors. HKMA’s Green and Sustainable Finance Grant Scheme should include transition loans in its support scope, encouraging local institutions and companies to structure loans under the Hong Kong Sustainable Finance Taxonomy (Phase 2A) and the Transition Loan Principles (TLP) — thereby enhancing the effectiveness of local financing in supporting corporate decarbonization.

Meanwhile, GTL holds significant relevance for mainland China and other Southeast Asian economies. In the global decarbonization journey, countries differ in starting points, technological readiness, and economic structures — resulting in “non-linear pathways.” Companies in developing and emerging markets often face greater challenges in technology, cost, and industrial transformation. GTL encourages stakeholders to consider regional realities when assessing project feasibility. This inclusive principle means companies in China and Southeast Asia can pursue net-zero transitions without rigidly applying mature Western standards — instead tailoring approaches to local industry structures and climate policy contexts.

For developing economies, this flexible standard of “differentiated pathways” is especially critical. It enables more regions and industries to access transition finance under real economic conditions — rather than being excluded from sustainable finance altogether.

V. Conclusion

Green finance is about outcomes. Sustainability-linked loans are about accountability. Transition loans are about defining the path to net zero — across different starting points and speeds. The Guide to Transition Loans not only establishes a globally consistent standard, but also offers practical financing directions for companies in Asia, especially in mainland China, Hong Kong, and Southeast Asia.

For financial institutions, this is both a product innovation and a new opportunity to fulfill social responsibility. For companies, it’s the most realistic step toward a low-carbon future. From “Green” to “Transition,” finance is becoming the greatest accelerator of industrial transformation.